Notes From Underground: Wake Up! Wake Up! For Your Light Has Come

This line comes from the Jewish liturgy of welcoming the Sabbath. I use it here to make a note to my readers about a possible signal that the NASDAQ 100 sent on Friday. Now I don’t hold myself out as anything but a third-rate TECHNICIAN (reader of chart formations), but having been taught by one of the greatest technical minds (thanks H.G.), I know to watch certain formations for signals in a POSSIBLE change in sentiment. THE CHART THAT CAUSES CONCERN NASDAQ 100 made ALL TIME HIGHS LAST WEEK BUT CLOSED BELOW THE PREVIOUS WEEK’S LOWS. Do I know when the market will reward a short position?

No. Do I know the timing of the beginning of a counter-trend move? No. I just know that a warning has been given, which may signal that a long DOW short Nasdaq play may be profitable. Maybe it is long the SPOOS and short Nasdaq, but I have been told to awaken from a complacency induced slumber. The NASDAQ provided the signal but the pundits will retort that the DOW closed higher on the day and the SPOOs were virtually unchanged. The end result for the bullish choir is that this is nothing but a healthy rotation out of the overbought tech stocks. Maybe that is correct but when I see certain historical formations I awaken to heightened market risks.

Notes From Underground has not been bearish equities and has maintained that the global central banks’ QE activities have kept global equity markets floating on the proverbial “sea of liquidity.” But to give strength to the warning sign, it happened on VERY HEAVY VOLUME. I am not recommending to rush out and sell your equity holdings or put on a massive short position. It is your job to determine the risk levels you feel comfortable with. I’m merely providing insight from 40 years as a global-macro trader. I am sure there will many comments so hopefully insights and ideas will be shared.

As weak as the NASDAQ was many correlated trades failed to materialize: gold weak, dollar firm, bonds lower/yields higher, and of course, the DOW finished up. The Nasdaq may be a false signal but the large volume numbers are telling me to pay attention. The pundits were blaming the steep drop in the Nasdaq on the Apple announcement but if our economy and equity markets are driven by the potential sales of the newest GADGET we have far greater worries. Dust off your charts and get to work.

***On Friday morning Rick Santelli and I covered the world. I noted that the biggest news on Thursday was not the British election, not the Comey hearings, but the ECB meeting and the Draghi press conference. The press tried to spin it as a hawkish stance. Even the Financial Times headlined, “ECB RULES OUT RATE CUT BUT CONFIRMS QE UNTIL YEAR END.” It led with, “The ECB took a first small step towards scaling back its ultra-loose policy when it said it would not cut its record-low interest rates any further, as it seeks to adjust to a surprisingly strong eurozone recovery.”

(Click on the image to watch me and Rick discuss the ECB.)

If NOT LOWERING RATES FROM A CURRENT -40 BASIS POINTS IS HAWKISH I AM LIVING IN AN ALTERNATIVE UNIVERSE. The key for the ECB is the balance sheet and sustaining the monthly increase is key to the DRAGHI strategy of covertly creating a EUROBOND over the objections of the German Bundesbank and Parliament. In maintaining his rationale for the QE program and citing no hint of normalization Mario Draghi noted:

Structural reforms in individual European states is still too slow to promote growth;

Global headwinds still exist;

Inflationary pressures revised downward because of lower oil prices;

Recovery needs the thrust of monetary policy to be successful.

In highlighting Draghi’s DOVISH stance, the ECB president noted several times that the central bank plans to keep the QE purchases and if NECESSARY TO EXTEND BEYOND THE PRESENT TIMELINE. Just the opposite of any type of tapering or normalization. Providing support to the ECB’s SOFT STANCE was the very sizable rally in the ITALIAN BTP market on Thursday and followed through with a greater rally on Friday. Mario’s steadfastness delivered relief to the Italian financial market.

What will be interesting is how Draghi is going to deal with the shortage of German sovereign debt. According to the ECB’s rules QE purchases have to be in line with the capital key which is based on the size of each member’s economy in relation to entire EU. Germany’s is 18% while Italy is 12%. The issue of available assets will continue to be a problem for Draghi, which raises the question about the ECB possibly buying equities in similar fashion a la the Bank of Japan and the Swiss National Bank. Something to ponder on the thinking about the undervaluations of the European equity markets in relationship to the U.S. market.

***The U.K. election. I have no opinion as to the fallout from the election mess caused by a miscalculation of voter sentiment by Prime Minister Theresa May. My main concern at this point is measuring the increase in the 18-24 group vote for if they turned out in much larger proportions than they did for Brexit it will be a game changer. Corbyn promised free everything to the young adults and if brought them to the polls. Be aware of a similar electoral stance by the Democrats in next years 2018 U.S. Congressional elections.

When I have a greater sense of what the election results mean for U.K. policy I will write, but it was interesting that the drop in the pound upon the election results revealed the impact of a weakened currency as a potential for increased corporate profits. This is a very temporal correlation, which will also decouple if the underlying policies are weakened by Theresa May being forced in an enhanced position of compromise.

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This entry was posted on June 11, 2017 at 9:08 am and is filed under ECB, Equity. You can follow any responses to this entry through the RSS 2.0 feed.
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You suggest Draghi may purchase equities as he runs out of German bonds to buy. With the Germans pushing back on the Draghi bond buying wouldn’t they fight the equity buying harder? Or would Draghi just ignore the Geramans and buy whatever he wants?

Trader–there are no rules when it comes to the preservation of the European Union–the entire QE program by the ECB is based on “whatever it takes” as announced by Draghi—contravention of law is not possible when the overwhelming raison de tat is the sustaining of the EU and the euro–the rest is commentary

If the youth in the West are indeed socialist in their ideology, I suspect it is because they have been “educated” so by a system with that bias. And the future will follow the youth. In contrast, here in the East, most favor free enterprise because the abysmal failures of a century of socialism are still a fresh memory, while the recent prosperity of the capitalist Asian “tiger” nations (Singapore, Taiwan, Hong Kong, South Korea) have become evident to all in the region, especially the Chinese.

Given these two diverging trends, the long term investment implications are obvious. Go east. In addition, both the growth prospects and valuations are more attractive in the East. It’s a no-brainer for the long run, really. Europe has more attractive valuations than the US, but the eurozone is crippled with a flawed currency structure in a socialist quagmire, and in the end, could end up as little more than an interesting tourist destination for vacationers from Asia, which is enjoying an exploding middle class that is now the largest consumer bloc in the world.

In situations like these (i.e. inconsistent macro relationship happening over an indefinite amount of time) how do you assess where to put your capital at risk?

Do you short equity index, long gold, long bonds concurrently?

Just my very humble observation, short equity index seems to be more compelling by way of chart formations. Followed by long bonds.

However, going long gold and short commodity currencies seem to be going against the current price action.

Hence, in current context, how do you determine where to trade or go to 100% cash? How about given your macro matrix (money going to places with highest risk-adjusted return) – how do you reconcile current situation with your matrix / money flows?

[…] Wake Up! Wake Up! For Your Light Has Come! This line comes from the Jewish liturgy of welcoming the Sabbath. I use it here to make a note to my readers about a possible signal that the NASDAQ 100 sent on Friday. Now I don’t hold myself out as anything but a third-rate TECHNICIAN (reader of chart formations), but having been taught by one of the greatest technical minds (thanks H.G.), I know to watch certain formations for signals in a POSSIBLE change in sentiment. THE CHART THAT CAUSES CONCERN NASDAQ 100 made ALL TIME HIGHS LAST WEEK BUT CLOSED BELOW THE PREVIOUS WEEK’S LOWS. Do I know when the market will reward a short position? […]